Memoranda submitted by EEF
INTRODUCTION
1. EEF is the representative voice of manufacturing,
engineering and technology-based businesses. We have a membership
of 6,000 companies employing more than 800,000 people. Comprising
11 regional EEF associations, the Engineering Construction Industries
Association and UK Steel, EEF is one of the UK's leading providers
of business services in employment relations and employment law,
health, safety and environment, manufacturing performance, education,
training and skills.
2. In preparing our response, we have consulted
with member companies as well as our regional officials. It should
be understood that although this is an EEF response, when discussing
the steel sector Climate Change Agreement (CCA), the views are
also those of UK Steel, the trade association for the steel industry
in the UK.
3. UK Steel represents about 98% of the
steel sector by energy use. The CCA represents, in total, 307.6PJ
of primary energy, equivalent to 24 million tonnes of carbon dioxide.
The sector has implemented significant saving measures and a rationalisation
programme that has resulted in an absolute reduction on carbon
dioxide emissions of 7.3 million tonnes between 1997 and 2006.
4. One of the key achievements of CCAs has
been to move energy efficiency and awareness up the business agenda.
This has brought about the implementation of significant efficiency
measures within businesses with CCAs and the targets have provided
companies with achievable goals. These actions all took place
at a time when energy prices were appreciably lower than at present.
5. The current climate change policy mix
does overlap and create confusion for businesses. The government
has failed so far to take on board the recommendation of the Stern
Report in calling for the greater use of environmental taxes alongside
trading and regulation and is currently advocating the use of
trading, rather than exploring other options. There sometimes
appears to be an assumption that emissions trading is the favoured
instrument. However, EEF believes the majority of businesses see
emissions trading falling behind taxation and regulation as the
preferred option for UK business.
6. In relation to costs associated with
Climate Change Levy (CCL) and CCAs, the UK steel industry operates
in a highly competitive global market in which overseas capacity,
quality and penetration of the UK market are all increasing rapidly.
Therefore any unilateral increase in costs will result in carbon
leakage to global markets not subjected to any carbon constraint.
This can actually result in an increase in global carbon emissions.
7. The UK steel industry has a turnover
of €10billion and employs approximately 25,000 people. Therefore
it is crucial to the financial viability of the sector to have
some long-term certainty in relation to the future of both the
CCL and CCAs.
8. Government should consider improving
incentives for energy efficiency in other business sectors by
extending the right to participate in CCAs to any sector that
can demonstrate a credible plan to deliver efficiency gains.
9. In parallel, looking further ahead to
the end of the current CCAs, EEF supports an option to scrap CCAs
for sectors that are subject to EU ETS. However, this would only
work if CCL is not applied to those sectors, so that installations
continue to receive the CCL 80% discount. Of course, the rebate
should only apply if the installation is in compliance with EU
ETS.
10. In some circumstances trading provides
the mechanism for companies to achieve carbon reductions at lowest
cost. In order to achieve the desired carbon reducing investment,
EEF agrees that the current price of UK allowances may be too
low. This could act as a barrier for some companies to implement
further energy savings measures because the "pay back"
time for certain projects will now be too lengthy.
11. Is it right for the Levy and Agreements
to target energy use, or should they be reformed to target carbon
emissions directly? If so, how should they be changed?
12. There are two separate issues here—how
the CCL is charged on energy use by commercial organisations and
how companies with CCAs are effectively measured against targets.
13. However, attitudes and understanding
have changed significantly since 2001. Therefore understanding
the carbon content of the energy a company is using could provide
member companies with a real ability (and incentive) to improve
their own carbon footprint by fuel or tariff switching.
14. There is no reason why a change to carbon
intensity rates for CCL could not be changed as soon as reasonably
possible, providing the overall burden is not increased.
15. A similar story holds true for the CCAs.
Participants of CCA can opt for one of four different currency
matrixes for their individual agreement. Two of these currencies
are carbon based and a number of facilities took this option in
2001. UK Steel believes the reason that most facilities opted
for energy targets was the perception that this type of target
would be administratively simple for reporting annual performance.
In 2001 most companies measured their energy use in kWh, rather
than carbon. Therefore, for ease of internal reporting of performance
to directors and staff, energy was the most suitable communication
method in order to increase energy efficiency.
16. With the advent of UK-wide carbon
budgets from 2008 (proposed under the draft Climate Change Bill),
how valuable is the focus of the CCL and CCA on the efficiency
with which business consumes energy? Would it be better to have
an instrument which enforced absolute caps in energy use (or CO2
emissions)?
17. One of the key achievements of CCAs has
been to move energy efficiency and awareness up the business agenda.
This has brought about the implementation of significant efficiency
measures within businesses with CCAs and the targets having provided
companies with achievable goals. These actions all took place
at a time when energy prices were appreciably lower than at present.
18. Relative targets have enabled facilities
to make changes within their processes in order to improve the
carbon footprint per unit of production. The value of relative
targets should not be underestimated as they provide a useful
benchmark for all stakeholders to measure day to day performance.
19. If absolute caps on energy were imposed
on companies then meeting targets may move away from implementing
energy efficiency improvements to reducing output, without actually
making the process less carbon intensive. It should also be noted
that emissions and energy use are not necessarily measuring the
same thing and either could be capped for certain industries or
processes without particularly constraining growth, whereas for
other industries it could well be a major constraint on growth.
An example of this would be fuel switching to reduce carbon emissions.
20. EEF opposes unilateral absolute energy
targets on UK industry, as they would serve only to disadvantage
UK industry against overseas competitors. Any measure that increases
costs to the UK steel sector will tend to increase imports from
areas of the world where these costs are not applied. This can
be clearly seen in Figure 1.
Figure 1
EUROPEAN PRICE-IMPORTS CORRELATION
Source: JPC Consulting
(courtesy of EUROFER)
21. Relative targets can also encourage
site rationalisation that results in significant absolute carbon
reductions, whereas absolute targets would discourage this abatement
opportunity.
22. How well do the Levy and Agreements
fit together with other existing and proposed climate change policies,
and what can be done to ensure maximum impact from complementary
policies with minimum administrative burden and overlap?
23. As has already been highlighted, there
is some overlap between the current climate change policy mix
which creates confusion for businesses. The government has still
not taken on board the Stern Report recommendations, which called
for greater use of environmental taxes alongside trading and regulation.
24. Although it is widely recognised that
EU ETS and CCA emissions overlap, it should be acknowledged that
Defra has worked hard to facilitate a workable solution that has
enabled both schemes to work alongside each other. The current
solution is not perfect, but does enable facilities to operate
in both schemes. The majority of CCA sectors have accepted that
this current system should be used at the next milestone period,
but then should be examined again for milestone five.
25. UK Steel has made clear to Defra that
during this review, it should engage fully with industry to develop
a more workable solution.
26. EEF believes that splitting both the
CCA and EU ETS targets could throw up anomalous results and confusing
reporting procedures. However, in the long term (post milestone
five) a mechanism for separating the coverage of CCAs, EU ETS
and the forthcoming Carbon Reduction Commitment (CRC) must be
sought, as EEF foresee the real possibility of a single business
being subjected to CCL, CCA, EU ETS and CRC simultaneously. Therefore
a company's carbon emissions will be priced three times over.
27. The administrative burden of complying
with the three schemes would be significant, in terms of different
targets, gases, coverage, verification, monitoring periods and
compliance factors, all separately agreed for each scheme. In
addition, those companies would be subjected to IPPC, with its
whole site approach to monitoring and reporting—again with
different reporting variables.
28. Businesses are able to use carbon
trading to meet their targets under the Climate Change Agreements.
What have been the impacts of trading so far? Should trading be
allowed in this way, or how should it be controlled?
29. Trading theoretically enables facilities
to achieve emission reductions at lowest cost and potentially
encourages industry to go beyond the agreed targets in certain
years, with the understanding that this "banked" surplus
can be used to offset annual fluctuations in other years.
30. Carbon trading is most efficient when
there are as few overlapping tradable quota schemes as possible.
Currently, in the energy and climate change policy area, there
are a number of such schemes, each with their own curency.
31. EEF does not believe that trading needs
to be controlled anymore than it is already by external verification
and the UK emissions trading registry.
32. Overachievement of the UK steel industry
CCA targets is largely due to significant investment rather than
unchallenging targets. For example, CELSA, a steel producer (via
the electric arc furnace route) in Cardiff, commissioned a new
meltshop that was completed at the end of 2006 at a cost of £90million.
In 2005 Corus installed increased boiler and generating capacity
at its integrated steel works in Port Talbot, which used gases
that were previously flared to atmosphere. The cost of the two
year project was £7.1million.
33. What have been the economic impacts
of the CCL and CCA on the organisations subject to them, and the
wider UK economy?
34. The steel sector has seen a significant
increase in energy costs associated with the CCL—the mandatory
20% levy adds £8.2million per year to the industry after
NI rebate. This significant sum would be better used to fund sector
wide energy efficiency measures and technological improvements
in carbon management. Overseas competitors are not subject to
this tax on energy.
35. The UK steel industry operates in a
highly competitive global market in which overseas capacity, product
quality and penetration of UK market are all increasing rapidly,
whereas the CO2 emissions are up to twice those of the EU15 average.
Therefore any unilateral increase in costs will result in carbon
leakage to global markets not subjected to any carbon constraint,
which is likely to result in an increase in global carbon emissions.
36. The 80% CCL rebate is vital to the survival
of the UK steel sector and UK Steel is becoming increasingly concerned
over its future. Industrial companies with CCAs are currently
uncertain about the climate change policy that will be applied
to them by government at the end of current CCAs. All energy intensive
industries are seeking an early start to discussions about the
future of CCAs. This is necessary not only to ensure that government
and energy intensive industries can start planning for target
periods after milestone five, but also to ensure exemption from
CRC. As discussed earlier CRC would add further complexity to
industries which have parallel obligations under CCAs, IPPC and
EU ETS.
37. Unless the CCL is scrapped at the end
of the CCAs, sectors with agreements will then be subject to pay
100% of the levy, which for the steel sector amounts to £42million,
which would be a crippling burden on the profitability of the
sector. UK Steel believes that there should be no delay in engaging
with industry to discuss the future climate policy measure direction
after March 2013, particularly bearing in mind the additional
uncertainty over the future direction of allocation policy under
EU ETS.
38. Should the Climate Change Agreements
be reformed in any way? For instance, should the Agreements be
simplified, or the sectoral targets made more stringent?
39. The agreements evolved in full consultation
with industry between 1999 and 2001, with the steel industry being
partly instrumental is developing the idea of the CCAs. Whilst
we accept that the agreements often appear to be complex, this
is largely due to the differing circumstances of sectors that
have signed up to them.
40. It should be remembered that CCAs were
the first emissions trading scheme developed in the UK and therefore
the development of sector agreements was a learning process for
both government and industry.
41. Although UK Steel would wish to see
CCAs simplified, it believes that now is not the time to carry
this out. We believe that a full review of the agreements would
be lengthy and resource intensive.
42. However, simple measures such as reforming
the 90/10 rule would greatly ease the administrative burden and
increase emissions reductions by expanding the coverage within
existing facilities. UK Steel would wish to see the rule changed
from 90/10 to something closer to 70/30.
43. Furthermore, we believe that the government
should improve incentives for energy efficiency in other business
sectors by extending the right to participate in CCAs to any sector
that can demonstrate a credible plan to deliver efficiency gains.
We do not believe that State Aid rules represent a major barrier
to extending CCAs, given the European Commission's more pragmatic
focus on major market distortions. Internal resources within Defra
may be a barrier but given the success of the CCA in improving
energy efficiency, resources from other programmes could be diverted
to support what is a very effective measure.
44. Defra's assessment of existing climate
change policies show that CCL and CCA have been one of the most
cost effective instruments and are projected to save significant
carbon emissions.[1]
45. UK Steel hope that lessons can continue
to be learnt from the failings of the current system, with which
to feed into the process of reforming the agreements at the end
of the final milestone in 2012 as discussed earlier.
46. It should be noted that the experience
of the current CCA has enabled government to design the forthcoming
CRC in a way that will hopefully avoid complex agreements that
may be present in CCAs.
47. In terms of making the CCA targets "more
stringent", there is the 2008 review of the milestone five
targets, which will again seek to amend the current agreement
milestone five target to reflect "all cost effective saving
measures". The last review took place in 2004 to review the
targets for milestones 3, 4 & 5 and tightened some of the
existing targets, where necessary. It should be noted that the
two reviews should not be used purely for tightening targets,
but as an opportunity for both parties of the agreements to take
stock and review whether the agreed targets still reflect "all
cost effective saving measures".
48. UK Steel is keen to engage now with
DEFRA in order to start the milestone five target review discussions
for the steel sector agreement, rather than wait for 2008.
49. Looking further ahead to the end of
the current CCAs, UK Steel supports an option to scrap CCAs for
sectors that are subject to EU ETS. However, this would only work
if CCL is not applied to those sectors, so that installations
continue to receive the CCL 80% discount. Of course the rebate
should only apply if the installation is in compliance with EU
ETS.
50. What are the main barriers to accelerating
energy efficiency in the business sector? How can these be overcome?
51. Research carried out by Enviros for
EEF in 2006[2]
suggests that there are a number of barriers that impede the take-up
of measures to improve energy efficiency. In many cases, attempts
to forecast the potential of energy efficiency to deliver reductions
in carbon emissions have failed to take sufficient account of
these barriers. It is therefore vital that policies to encourage
greater energy efficiency are based on a full understanding of
these barriers and how to overcome them. The research and face-to-face
interviews highlighted the following barriers:
— Costs. The benefits to the firm from
investments that would yield significant gains in energy efficiency
are often outweighed by the costs or are sufficiently uncertain
to prevent the investment from going ahead. This view has been
strongly supported by extensive work undertaken by Enviros in
a report for Defra.
— Hidden costs. The Enviros work also
identified "often (significant) additional costs, over and
above financial costs, that will also influence an end-user's
decision of whether or not to invest in energy efficiency measures".
These include paying specialists in areas such as safety, the
impact on energy systems and a range of auditing requirements.
— Skills. Smaller firms will often
lack staff with the skills required to assess the costs, including
hidden ones, and benefits associated with investing in energy
efficiency. This is supported by the findings in EEF's survey
that management time and information were the major reasons for
not undertaking energy efficiency audits. In addition, companies
in energy intensive sectors tend to require more complex solutions
and technical experts are becoming increasingly rare.
— Lack of R&D. The energy intensive
sector is more likely to have undertaken all the easily achievable
steps to implement energy efficiency measures. Further abatement
potential is therefore more difficult to achieve, and for some
processes will require a step change in technology. The lack of
a programme similar to that undertaken by the Energy Technology
Support Unit in the early 1990s may have slowed progress in this
area. Anecdotal evidence supports this point and further evaluation
needs to be undertaken to assess the impact of this apparent gap.
— Competition for funds within trans-national
organisations. A growing number of UK manufacturers, both UK and
foreign-owned, have plants outside of this country. Therefore,
the UK plants will be competing for investment within organisations.
Unless the company can prove a significant return on investment,
compared with competing sites, it is unlikely to get the budget
required to make the investment. This is likely to be a problem
for firms with ageing plants, which are probably most in need
of action to improve their energy efficiency. Understanding the
factors that influence the strength of these barriers will help
to target measures to overcome them. Our work highlights four
key influences that drive or hinder a company's response to energy
efficiency:
— the energy intensity of its activities
and processes;
— whether it is subject to compliance
requirements such as EU ETS or climate change agreements (CCAs);
— its participation in voluntary initiatives
such as ISO14001 and the Corporate Social Responsibility (CSR)
agenda, including influences through the supply chain.
52. Products which can increase energy
efficiency (such as insulating glass for windows) can be energy-intensive
to manufacture. Policies such as the CCL and CCA can penalise
manufacturers for making such products. How big an issue is this,
and what, if anything, should be done about it?
53. The steel sector has made significant
investment into lightweight automotive products.[3]
Key outputs of these projects include a holistically designed
steel body structure that meets tough structural and crash criteria
while weighing 25% less and costing no more than typical vehicles
in its class. Producing lightweight, structurally sound steel
automotive suspensions that achieve up to 34% mass reductions
over conventional steel systems.
54. Climate change policies should not undermine
the production of energy efficient products
55. Alongside the CCL, the Government
introduced the Enhanced Capital Allowances, to further encourage
firms to make energy saving investments. How well is this scheme
working? How well does it fit with other existing or proposed
climate change instruments?
56. The take up of Enhanced Capital Allowances
(ECA) has not been as comprehensive as envisaged. The scheme is
seen as complex and restrictive, with not all energy efficient
products qualifying for inclusion to the list. EEF members do
not see the financial benefit to be significant enough to cancel
out the increased cost of purchasing plant from the list, as these
products increase in price once they qualify for inclusion.
57. ECA is only of value to businesses that
are in profit. Loss makers cannot benefit. This is a major drawback
and therefore take up is limited.
58. EEF would like to see the percentage
of ECA increase from 100% to something closer to 200%. We hope
that this would then provide a significant driver, both for manufacturers
to produce plant capable for inclusion to the ECA list and then
companies the incentive to purchase those products. Price competition
will be greater, as more products are included on the list.
59. All EEF members have paid CCL since
April 2001 and we are therefore concerned that monies raised by
the Levy have not, as announced, been spent on promoting improvements
in energy efficiency. When CCL was introduced the government proposed
to set aside £50million per year to fund the ECA scheme.
EEF would like assurances that this money will be spent in the
way proposed, rather than being transferred to the consolidated
fund.
60. The Levy exempts electricity from
renewables, though so far this appears to have had little impact.
Should it play a greater role in incentivising the growth of renewable
electricity, and, if so, how?
61. CCL and CCAs have played a role in incentivising
the growth of renewables. In response to both CCL and compliance
with CCA targets, facilities have made informed decisions on how
the electricity they consume is generated.
62. EEF believe however, that the primary
function of CCL and CCAs is not to increase the proportion of
renewables, which in our opinion is the function of the Renewables
Obligation, which EEF members are paying for through electricity
prices.
63. The Levy has been a greater driver
of change in energy-intensive industries than in those which are
less energy-intensive. What role is there for a climate change
tax in less energy-intensive sectors and how will it work alongside
the Carbon Reduction Commitment?
64. Although we can easily separate both
energy-intensive and less energy-intensive sectors within CCAs,
it can be argued that all sectors that are part of the agreements
are indeed, energy-intensive. These so called "less energy-intensive
sectors" with a CCA have arguably benefited more, in qualitative
terms, from having a CCA than more energy-intensive sectors.
65. Pre-CCAs, energy-intensive sectors were
to a large extent engaged in implementing energy savings measures,
as the cost of energy as a proportion to the overall costs is
high. However, sectors where energy costs were approximately 2%
of overall costs may not, on the whole, see energy efficiency
as a high priority. In our experience, this has changed significantly
and as a result, carbon management has risen higher up the boardroom
agenda.
66. It is our belief that this is as a direct
result of the sector CCAs. As Monitoring, Reporting and Verification
(MRV) systems are implemented into the operations of facilities,
a greater understanding of energy usage, and ideas for reducing
energy, within the whole organisation takes place.
67. From the perspective of the taxpayer
and competitive rivals, is it right that some businesses can be
given a tax discount despite failing to achieve their Agreement
targets?
68. In the vast majority of sector agreements
this situation would not be possible, as it would require a company
giving away, free of charge, surplus allowances to its competitor.
In reality what happens is that each facility in the sector agreement
meets its target exactly and then this performance is collated
to arrive at the sector performance. Any facility then not meeting
its target though either emissions reductions, or by trading would
be de-certified by the Secretary of State.
69. Should the Government conduct more
analysis to assess the scale of any potential error in the total
carbon savings figure generated from the results of the Agreements?
70. The government has carried out a robust
verification system since the agreements were established. Random
audits are carried out at a number of facilities per year. This
system sends a strong signal to other facilities to ensure that
data are robust and verifiable by external verifiers. As an organisation
that manages the steel CCA, we also use government feedback from
audits to assist facilities to improve their data and monitoring,
reporting and verification systems.
71. UK Steel would be happy to see the number
of audits increased, if there were concerns around the accuracy
of the data.
72. Carbon trading is becoming a more
important way for businesses to meet their targets under the Agreements.
What will be the impact if businesses purchase carbon credits
(if they continue to be traded at low prices) rather than push
for greater energy efficiencies? Is the large surplus of carbon
credits, which could be used in future target periods, a problem?
73. As previously discussed, trading is
a reasonable way for facilities to meet their targets. Trading
provides the mechanism for companies to achieve carbon reductions
at lowest cost. EEF agree that the current price of UK allowances
is too low and this could act as a barrier for companies to implement
further energy savings measures because the "pay back"
time for certain projects will now be too lengthy.
74. Facilities that have invested in measures
to reduce their carbon footprint with a view to selling this surplus,
may now find that the monetary reward for making those investments
has been drastically reduced.
75. It should be acknowledged by all stakeholders
that the current low prices of UK allowances is not as a result
of the CCA targets being too easily met, but rather a design fault
of the UK ETS, that led to a massive oversupply of allowances
that flooded the CCA allowance market.
76. EEF would support measures that would
result in an increase in the price of the UK allowance market,
in order to further stimulate future energy efficiency projects
within member companies. EEF accept that this has been partly
addressed through the voluntary retirement of UK allowances by
some of the participants of the UK ETS. However, this measure
did not go far enough.
77. Does it matter that econometric estimates
of policy impact can vary widely due to changes in business as
usual projections, even if policies are working as expected? In
the case of the Agreements, what are the implications of the fact
that taxpayers are receiving less value for the tax foregone?
78. The CCL is revenue neutral and designed
as such through the reduction of employers National Insurance
(NI) contributions. Although for most sectors with CCAs the CCL
is not fiscally neutral, as their energy intensity is far greater
than the number of people they employ and consequently the cost
of CCL (even at the 20% rate) is higher than the reduction in
employers NI contributions.
1 October 2007
1 Review by the National Audit Office: Cost-effectiveness
analysis in the 2006 Climate Change Programme Review (January
2007) http://www.nao.org.uk/publications/nao-reports/06-07/Climate-Change-analysis.pdf Back
2
Increasing energy efficiency in manufacturing: barriers and opportunities.
EEF, 2006. Back
3
http://www.worldautosteel.org/ Back
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